FISCAL EXPOSURES

Improving Cost 

Recognition in the 

Federal Budget

Report to the Chairman, Committee on 

the Budget, House of Representatives

October 2013

GAO-14-28

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-14-28, a report to the 

Chairman, Committee on the Budget, House 

of Representatives

October 2013

FISCAL EXPOSURES

Improving Cost Recognition in the Federal Budget

Why GAO Did This Study

The federal government’s long-term 

fiscal imbalances are driven on the 

spending side by the effects of an 

aging population and rising health care 

costs on Social Security and major 

federal health programs. However,

GAO identified a variety of other fiscal 

exposures—responsibilities, programs, 

and activities that may legally commit

or create the expectation for future

federal spending—that vary as to 

source, extent of the government's 

legal commitment, and magnitude. A 

more complete understanding of these 

other fiscal exposures can help 

policymakers anticipate changes in 

future spending and enhance control 

and oversight over federal resources.

GAO was asked to provide information 

on risks facing the federal budget. This 

report (1) examines selected programs 

that create a fiscal exposure, including 

the extent and estimated magnitude of 

the government’s legal commitment; 

and (2) assesses how fiscal exposures 

could be better recognized in the 

budget. Based on its review of budget 

and financial data, GAO selected nine 

programs, including federal employee 

benefit programs, insurance programs, 

and the stock purchase agreements 

with Fannie Mae and Freddie Mac, and 

drew upon previous work to discuss 

potential approaches for improving 

budgetary attention to fiscal exposures. 

What GAO Recommends

GAO is not making new 

recommendations but this analysis 

provides additional support for past

recommendations to improve budget 

recognition of fiscal exposures by, for 

example, expanding the availability 

and use of information on expected 

future spending arising from 

commitments made today. 

What GAO Found

Fiscal exposures may be explicit in that the federal government is legally 

required to pay for the commitment; alternatively, it may be implicit in that the 

exposure arises from expectations based on current policy or past practices. The 

nine programs GAO examined illustrate the range of federal fiscal exposures 

(see figure) and how they can change over time. Also, some programs may have 

elements of both explicit and implicit exposure. Federal insurance programs, for 

example, fall across the spectrum: if an event occurs, some payment is legally 

required—an explicit exposure. However, there may be an expectation that the 

government will provide assistance beyond the amount legally required—that is

an implicit exposure. Prior to 2008, securities issued by Fannie Mae or Freddie 

Mac were explicitly not backed by the U.S. government. However, in response to 

the financial crisis, the government’s agreement to provide temporary assistance 

to cover their losses up to a set amount created a new explicit exposure. The 

amount of future spending arising from federal fiscal exposures varies in the 

degree to which it is known and can be measured. 

Figure: Selected Programs Illustrate the Range of Fiscal Exposures

For some exposures GAO found that the budget provided incomplete information 

or potentially misleading signals regarding the full cost of the commitments made

today. A uniform across-the-board approach to make fiscal exposures more 

apparent when making budget decisions may not be appropriate given their

varying characteristics. Several factors need to be taken into account in selecting 

an approach to better recognize fiscal exposures in the budget: the extent of the 

government’s legal commitment; the length of time until the resulting payment is 

made; and the extent to which the magnitude of the exposure can be reasonably 

estimated. Expanding the availability and use of supplemental information, 

including measures that can signal significant changes in the magnitude of fiscal 

exposures, would be an important first step to enhancing oversight over federal 

resources and can aid in monitoring the financial condition of programs over the 

longer term. Incorporating measures of the full cost into primary budget data 

would provide enhanced control over future spending, which can help both 

improve the nation’s fiscal condition and enhance budgetary flexibility. View GAO-14-28. For more information, 

contact Susan J. Irving at (202) 512-6806 or 

irvings@gao.gov.
Page i GAO-14-28 Fiscal Exposures

Letter 1 

Background 5

The Budget Provides Incomplete Information about Some Fiscal 

Exposures 8

Approaches to Better Recognize the Programs that Create Fiscal 

Exposures in the Budget 13

Concluding Observations 16

Agency Comments and Our Evaluation 17

Appendix I Information on Selected Fiscal Exposures 19

Appendix II Comments from the Department of Veterans Affairs 53

Appendix III GAO Contact and Staff Acknowledgments 55

Figures

Figure 1: Spectrum of Fiscal Exposures 6

Figure 2: Selected Programs Illustrate Range of Fiscal Exposures 9

Figure 3: Federal Crop Insurance Corporation, Outlays and 

Resources, Fiscal Years 2001 through 2012 21

Figure 4: National Flood Insurance Receipts, Outlays, and Net 

Position, Fiscal Years 2001 through 2012 24

Figure 5: Pension Benefit Guaranty Corporation Net Position and 

Revolving Fund Cash Flows, Fiscal Years 2001 through 

2012 27

Figure 6: Treasury Agreements with Fannie Mae and Freddie Mac, 

Fiscal Years 2008 through 2012 30

Figure 7: Accrued Defined Benefit Pension Liability and Trust Fund 

Balance, Fiscal Years 2001 through 2012 37

Figure 8: Accrued Liability for Civilian Post-Retirement Health 

Benefits, Fiscal Years 2001 through 2012 40

Figure 9: Military Pension Benefits Accrued Liability and Budgetary 

Resources in the Military Retirement Fund, Fiscal Years 

2001 through 2012 44

Contents 
Page ii GAO-14-28 Fiscal Exposures

Figure 10: Military Post-Retirement Health Liability and MedicareEligible Retiree Health Care Fund Balance, Fiscal Years 

2003 through 2012 48

Figure 11: Veterans Compensation and Pensions Liability and 

Annual Outlays, Fiscal Years 2001 through 2012 51

Abbreviations

CBO Congressional Budget Office 

CSRDF Civil Service Retirement and Disability Fund

CSRS Civil Service Retirement System

DOD Department of Defense 

DHS Department of Homeland Security

FCIC Federal Crop Insurance Corporation

FEHB Federal Employee Health Benefits

FEMA Federal Emergency Management Agency

FERS Federal Employee Retirement System

FHFA Federal Housing Finance Agency

Financial Financial Report of the United States Government 

 Report 

GSEs government-sponsored enterprises

MERHCF Medicare-Eligible Retiree Health Care Fund

NDAA National Defense Authorization Act

NFIP National Flood Insurance Program

OMB Office of Management and Budget 

OPM Office of Personnel Management 

PBGC Pension Benefit Guaranty Corporation

RMA Risk Management Agency

TFL TRICARE for Life 

Treasury Department of the Treasury

TSP Thrift Savings Plan

VA Department of Veterans Affairs

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Page 1 GAO-14-28 Fiscal Exposures

441 G St. N.W.

Washington, DC 20548

October 29, 2013

The Honorable Paul D. Ryan

Chairman, Committee on the Budget

House of Representatives

Dear Mr. Chairman,

Our simulations of the federal government’s long-term fiscal outlook lead 

to an overarching conclusion: current fiscal policy is unsustainable over 

the long term. In these simulations debt held by the public continues to 

grow over the coming decades as a share of gross domestic product. 

This growth is driven by a fundamental imbalance between revenue and 

spending, which on the spending side, is driven by the aging of the 

population and rising health care costs. Absent reform of federal 

retirement and health programs—including Social Security, Medicare, and 

Medicaid—federal budgetary flexibility will become increasingly 

constrained. In recent years, emerging issues and unanticipated events 

have increased awareness of additional pressures on current and future 

federal budgets; addressing the federal government’s fiscal sustainability 

challenges is important for maintaining the budget flexibility to respond 

quickly and adequately to them. As we have reported before, 

understanding the longer-term budget implications of policy decisions at 

the time decisions are made permits more informed discussion of both 

overall program and specific design features. Addressing the fiscal 

challenges of the future will require looking at the entire range of federal 

activities and making difficult choices in setting priorities and linking 

resources to results. Consideration of the tradeoffs inherent in these 

decisions can be facilitated if there is comparable information on both the 

near-term and long-term budget implications of existing programs.

Our past work identified a variety of fiscal exposures—responsibilities, 

programs, and activities that may either legally commit1 the federal 

government to future spending or create the expectation for future 

spending.2 Fiscal exposures vary widely as to source, extent of the 

 

1For purposes of this report, the term legal commitment refers to the government’s 

responsibility for future financial obligations. 

2GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-Term Costs and 

Uncertainties, GAO-03-213 (Washington, D.C.: Jan. 24, 2003).

 
 

Page 2 GAO-14-28 Fiscal Exposures

government’s legal commitment, and magnitude. Further, some of these 

factors may change over time. For example, the government’s response 

to an event or series of events can strengthen expectations that the 

government will respond in the same way to similar events in the future. 

The magnitude of the exposure in a given area may also change: for 

example, increased population density in coastal areas may increase the 

magnitude of exposures from natural disasters. A more complete 

understanding of the sources of fiscal exposures and the way they are 

changing can provide enhanced control and oversight over federal 

resources. Policymakers can then respond to any changing risks as they 

deem it appropriate.

You asked that we provide information on identifying, monitoring, and 

measuring new or evolving risks facing the federal budget. In this report, 

we (1) describe selected programs that create a fiscal exposure, including 

the extent and estimated magnitude of the government’s legal 

commitment, and discuss the implications of these fiscal exposures for 

the budget,

3 and (2) assess how fiscal exposures could be better 

recognized during the budget process.

Many activities can be thought of as fiscal exposures. This report focuses 

on a subset of fiscal exposures that represent legal commitments for 

future spending. We do not discuss the major social insurance programs 

(Social Security, Medicare, and Medicaid) and other exposures, such as 

disaster assistance to state and local governments or the costs of 

maintaining federal infrastructure, where future spending stems all or in 

part from implied commitments embedded in current policies or past 

practices.

To identify programs for our analysis, we reviewed budget and financial 

data from 2001 to 2012 and past work on fiscal exposures. We identified 

a number of programs for in-depth review that legally require the 

government to make payments in the future, including those where 

payments may be contingent on the occurrence or nonoccurrence of a 

given event. From that group, we selected programs in which the cost 

reported in the Financial Report of the United States Government 

(Financial Report) was typically greater than the amount reflected in the 

 

3The term “budget” can refer to a variety of plans, including the President’s budget, the 

congressional budget resolution or an agency’s budget documents. In this report, we 

focused on reporting in the President’s budget. See, 31 U.S.C. § 1105.
 

Page 3 GAO-14-28 Fiscal Exposures

budget.4 In addition, to facilitate an assessment of current budget 

treatment, we selected programs for which the outlays and dedicated 

receipts could be easily identified in budget accounts.

The fiscal exposures we discuss in this report are:

• federal crop insurance;

• national flood insurance;

• pension insurance;

• stock purchase agreements with Fannie Mae and Freddie Mac;

• civilian pension benefits;

• civilian post-retirement health benefits;

• military pension benefits;

• military post-retirement health benefits; and

• veterans compensation.

For each of these programs, we examined the extent of the government’s 

legal commitment and estimated magnitude of the exposure by reviewing 

the budget, the Financial Report, agency documents and financial 

reports, and our related reports. For the federal crop insurance program, 

we compared outlays with resources available to the program for fiscal 

years 2001 to 2012. For the National Flood Insurance Program (NFIP) 

administered by the Federal Emergency Management Agency (FEMA) 

and pension insurance administered by the Pension Benefit Guaranty 

Corporation (PBGC), we compared the cash flows recorded in the budget 

account with reported changes in the net position (the difference between 

the program’s assets and liabilities) for fiscal year 2001 to 2012. For 

Fannie Mae and Freddie Mac, we compared the outlays from the 

Department of the Treasury (Treasury) to these government-sponsored 

enterprises (GSEs)—as directed under the terms of the stock purchase 

agreements—with estimates of the government’s likely commitment, as 

reported in the Financial Report for fiscal year 2008 to 2012. For federal 

employee benefit programs, we compared past spending and revenue 

data by budget account in the President’s budget with estimates of costs 

incurred based upon the liabilities and expenses reported in the Financial 

 

4The Financial Report is prepared by the Department of the Treasury, in coordination with 

the Office of Management and Budget (OMB). Generally, a cost is recorded in the 

Financial Report on an accrual basis—when the obligation is incurred rather than when it 

is paid; as such costs for some programs are recognized earlier than in the budget, which 

generally measures outlays on a cash or cash-equivalent basis.
 

Page 4 GAO-14-28 Fiscal Exposures

Report or agency financial reports from fiscal years 2001 to 2012, when 

available.5 For programs funded by a trust fund, we compared trust fund 

balances reported in the budget to estimates of the net present value of 

future benefits for the program, as measured by its liability in the Financial 

Report.

6 To analyze the current budget treatment of the exposures and 

how the budget recognition could be improved, we drew upon our body of 

work on fiscal exposures, including work on federal insurance and 

environmental disposal liabilities,7 other nations’ use of accrual budgeting 

to better recognize the full cost of government programs and activities,8

and on the budget process and mechanisms to control spending and 

manage fiscal exposures.9 While changes to the budget reporting may 

suggest the need for policy changes, our focus is on providing better 

information to make policy choices, not on what those choices should be.

We determined that the data from the budget were sufficiently reliable for 

representing the costs recognized in the budget. In our audit of the 

Financial Report, we were unable to determine the reliability of significant 

portions of the government’s assets, liabilities, and costs, including the 

reliability of estimates reported for the military postretirement health 

 

5The budget reflected contributions to a trust fund from the Department of Defense for 

TRICARE for Life as of 2003.

6Federal trust funds are used to link earmarked receipts with the expenditures of those 

receipts for a dedicated purpose. For example, monies in the Civil Service Retirement and 

Disability Fund and Military Retirement Fund are dedicated to fund long-term pension 

commitments. Fund balances stem from a combination of receipts and appropriated 

contributions from the general fund, which include interest payments and the employer 

share of federal employee pension costs. See GAO, Federal Trust and Other Earmarked 

Funds: Answers to Frequently Asked Questions, GAO-01-199SP (Washington, D.C.: Jan. 

2001). Data for civilian pension liabilities were obtained from the Office of Personnel 

Management’s (OPM) financial reports.

7GAO, Long-Term Commitments: Improving the Budgetary Focus on Environmental 

Liabilities, GAO-03-219 (Washington, D.C.: Jan. 24, 2003) and Budget Issues: Budgeting 

for Federal Insurance Programs, GAO/AIMD-97-16 (Washington, D.C.: Sept. 30, 1997).

8GAO, Budget Issues: Accrual Budgeting Useful in Certain Areas but Does Not Provide 

Sufficient Information for Reporting on Our Nation’s Longer-Term Fiscal Challenge, 

GAO-08-206 (Washington, D.C.: Dec. 2007); and GAO, Accrual Budgeting: Experiences 

of Other Nations and Implications for the United States, GAO/AIMD-00-57 (Washington, 

D.C.: Feb. 18, 2000). 

9GAO, Mandatory Spending: Using Budget Triggers to Constrain Growth, GAO-06-276

(Washington, D.C.: Jan. 31, 2006); and GAO, Budget Policy: Issues in Capping 

Mandatory Spending, GAO/AIMD-94-155 (Washington, D.C.: Jul. 18, 1994).
 

Page 5 GAO-14-28 Fiscal Exposures

benefit liability used in this report. However, we determined the data from 

the Financial Report were sufficiently reliable for representing the 

estimated magnitude of future spending arising from commitments 

incurred today. To assess the reliability of the data collected from agency 

financial reports for pension insurance and civilian pension liabilities, we 

reviewed the independent audit reports on PBGC and Office of Personnel 

Management’s (OPM) financial statements; the auditors determined that 

financial information was fairly presented and therefore we determined 

that the data were sufficiently reliable for illustrating the programs’ 

financial conditions.

We conducted this performance audit from September 2012 to October 

2013 in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform the audit to 

obtain sufficient, appropriate evidence to provide a reasonable basis for 

our findings and conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis for our findings 

and conclusions based on our audit objectives.

We developed the conceptual framework for fiscal exposures in 2003, in 

order to facilitate the discussion of long-term costs and uncertainties that 

present risks for the federal budget in the future.10 Fiscal exposures vary 

widely as to source, extent of the government’s legal commitment, and 

magnitude. Figure 1 illustrates the range of the legal commitment. Fiscal 

exposures may be explicit in that the government is legally required to 

fund the commitment, or implicit in that an exposure arises not from a 

legal commitment, but from current policy, past practices, or other factors 

that may create the expectation for future spending. Some exposures 

present elements of both explicit and implicit exposures. Insurance 

programs are a key example. If an event occurs, some payment is legally 

required; this represents an explicit exposure. There may be an 

expectation that the government will provide assistance beyond the 

program’s total available resources or budget authority (e.g., flood 

insurance payments made in response to a major disaster): this 

expectation represents an implicit exposure.

 

10GAO-03-213. 

Background 
 

Page 6 GAO-14-28 Fiscal Exposures

Figure 1: Spectrum of Fiscal Exposures

The amount of future spending arising from these exposures varies in the 

degree to which it is known and can be measured. For example, federal 

employee pension benefit payments can be reasonably estimated; 

accrued liabilities for earned benefits that will be paid in the future are 

reflected in the Financial Report. However, future payments to cover 

insured losses for events, such as terrorist attacks or catastrophic

weather-related events, are more difficult to estimate due to uncertainty 

over whether the events will occur, when they will occur, and their 

severity. Estimates for some programs are further complicated when past 

experience indicates significant variability in payments.

Some of the largest fiscal exposures facing the federal government are 

the future payments for social insurance and health programs, particularly 

Social Security, Medicare, and the federal portion of Medicaid, which 

largely stem from the expectation that commitments embedded in current 

policies will continue.11 Spending for these programs is expected to grow 

considerably in the future due to the nation’s aging population and rising 

health care costs. Our April 2013 simulations show that spending on 

these programs will increase under a range of assumptions. For example, 

assuming current law is generally continued, spending would increase 

 

11Social insurance programs are generally defined as government programs intended to 

protect households or individuals against certain social risks including loss of income. In 

contrast to other federal insurance programs, these programs are generally viewed as 

transfer payments, which are benefits provided without requiring the recipient to provide 

current or future goods or services of equivalent value in return. In this respect, they are 

different from pension and other employee compensation that is provided in exchange for 

services. 
 

Page 7 GAO-14-28 Fiscal Exposures

from 10 percent of GDP in 2010 to 13.6 percent of GDP by 2030, 

absorbing an increasing share of federal revenue and reducing future 

budget flexibility.12 Should the amounts of funding needed to cover future 

benefits exceed the amounts available in corresponding trust funds, there 

may be an expectation that the government will use federal funds to pay 

the difference, even though there would be no legal commitment on 

behalf of the government to do so. Significant information on the 

estimated future spending for Social Security and Medicare is available; 

in addition to our long-term fiscal simulations, the Congressional Budget 

Office (CBO) and the administration regularly publish long-term fiscal 

simulations, which illustrate the expected growth in spending for these 

programs.13

Future spending for other implicit exposures can be more difficult to 

estimate. For example, the frequency and magnitude of declared 

disasters has increased in recent decades, resulting in billions of dollars 

of supplemental appropriations. FEMA has obligated over $80 billion in 

federal assistance for disasters declared during fiscal year 2004 through 

2011. The unpredictable nature of such events makes estimating future 

spending difficult.

In some instances, current budget treatment does not fully capture or 

facilitate explicit consideration of some fiscal exposures at the time policy 

or program design decisions are made because some primary budget 

data—receipts and outlays—are generally measured on a cash or cashequivalent basis—that is, when cash is received or paid, rather than when 

costs are incurred. For programs where the time between the incurrence 

of a cost and resulting payment is relatively short, the budget often 

provides sufficient information on and control over the government’s 

spending commitments. However, for some programs, where cash flows 

to and from the government span many budget periods, or where the 

government legally obligates itself to make future payments or incur 

 

12GAO, The Federal Government’s Long-Term Fiscal Outlook: Spring 2013 Update, 

GAO-13-481SP, (Washington, D.C.: Apr. 11, 2013). These figures also include spending 

for other federal health programs delivered through the states – the Children’s Health 

Insurance Program and the subsidies available to assist individuals to purchase insurance 

coverage through the American Health Benefit Exchanges. 

13See Congressional Budget Office, The 2012 Long-Term Budget Outlook (Washington, 

D.C.: Jun. 5, 2012) and Office of Management and Budget, Analytical Perspectives, 

Budget of the U.S. Government, Fiscal Year 2014 (Washington, D.C., Apr. 10, 2013). 
 

Page 8 GAO-14-28 Fiscal Exposures

losses if an event occurs in the future, the generally cash-based 

measures used in the budget do not reflect the magnitude of the 

government’s legal commitment of future resources at the time decisions 

are being made. If the full cost of a spending decision is included in the 

budget when the decision is made, then decision makers can consider 

the total costs when setting priorities, comparing the cost of a program 

with its benefits, or assessing the cost of one method of reaching a 

specified goal with another. Decision makers’ ability to make informed 

choices would be improved by increased transparency regarding the 

impact of policy decisions on the expected path of spending and revenue.

Expected future spending arising from some exposures is recognized in 

the financial statements, which report costs on an accrual basis. 

Generally, under financial accounting standards, liabilities are recorded 

for probable and measureable outflows of resources arising from past 

transactions and events. Also, under accounting standards, the cost of 

claims for federal insurance programs that are deemed probable and 

measurable is considered a liability; reasonably possible losses are 

disclosed in the notes to the financial statements. Therefore, some 

measures reported in the government’s financial statements can be 

useful indicators of future spending arising from certain fiscal exposures.

The nine programs we examined illustrate a range of fiscal exposures in 

which the extent of the government’s legal commitment varies (see figure 

2).14 For example, civilian pension benefits are explicit exposures 

because the government has a legal commitment to pay pension benefits 

earned by current employees who will receive benefits in the future and to 

pay retirees who currently receive benefits. Other fiscal exposures, such 

as federal insurance programs, fall across the spectrum. For example, if 

extreme weather causes crop losses, the government is legally required 

to provide funds to cover associated crop insurance claims. However, 

there are some insurance programs—such as pension insurance—for 

which the government is not legally required to cover claim losses in 

excess of available resources. Pension insurance claims up to the 

statutory limit are explicit exposures; losses in excess of PBGC’s 

available resources represent an implicit exposure for the federal 

 

14See appendix I for information on the extent and estimated magnitude of these fiscal 

exposures.

The Budget Provides 

Incomplete 

Information about 

Some Fiscal 

Exposures 
 

Page 9 GAO-14-28 Fiscal Exposures

government to the extent there is an expectation that the government 

would step in and cover losses beyond the program’s reserves.15

Figure 2: Selected Programs Illustrate Range of Fiscal Exposures

For some exposures, the extent of the government’s legal commitment 

has changed over time. For example, the fiscal exposure created by 

Fannie Mae and Freddie Mac changed in recent years as the government 

responded to the financial crisis. Prior to 2008, securities issued by 

Fannie Mae and Freddie Mac were explicitly not guaranteed by the 

federal government and the government had no legal responsibility to 

provide support to these GSEs. However, in response to the financial 

 

15PBGC is a wholly-owned corporation of the U.S. government. Its financial activities are 

included in the federal budget and consolidated financial statement of the U.S. 

government. PBGC is required to be self-financing and does not receive funds from the 

general fund of the Treasury. See appendix I for more details.
 

Page 10 GAO-14-28 Fiscal Exposures

crisis, the government placed them into conservatorship and agreed to 

provide temporary assistance, creating a new explicit exposure.16

The budget does reflect some or all of the cost of the government’s legal 

commitment for some exposures. For example, for crop insurance, 

budget authority17 is provided to cover the cost of premium subsidies, 

claims payments, and administrative expense subsidies. For military and 

civilian pensions, agencies are required to make contributions out of 

current budget authority to cover some of the costs of civilian and military 

pension benefits earned by current employees. These contributions 

reduce the funds available to each agency to fund other activities. 

However, the recognition is incomplete because the contributions are not 

set to cover the full cost. In addition, we found that the budget provides 

incomplete information or potentially misleading signals about today’s 

legal commitments for some other exposures as well. Our selected fiscal 

exposures generally demonstrate one or more of the following 

characteristics: 

The full cost of commitments incurred today is not recorded in the 

budget until the corresponding outlays are made in the future. For 

example, for veterans compensation and civilian post-retirement health 

benefits, the budget reflects benefit payments in a given year, instead of 

capturing the cost of benefits earned today that will need to be paid in the 

future.

Similarly, the cost of pension insurance accrued in a given year is not 

reflected in the budget; rather, premiums are shown as receipts when 

they are collected and payments are shown as outlays when they are 

made. This focus on annual cash flows does not reflect the government’s 

cost for pension insurance because the time between the extension of the 

insurance, the receipt of premiums and other collections, the occurrence 

 

16The Federal Housing Finance Regulatory Reform Act of 2008 established the Federal 

Housing Finance Agency (FHFA), which was created to enhance authority over these 

GSEs and provide the Secretary of the Treasury with certain authorities intended to 

ensure the financial stability of these GSEs. Treasury entered into a Senior Preferred 

Stock Purchase Agreement (hereafter referred to as the agreements) with each GSE. The 

agreements, which have no expiration date, provide that Treasury will disburse funds to 

these GSEs if at the end of any quarter the FHFA determines that the liabilities of either 

GSE exceed its assets. 

17Budget authority is the authority to incur obligations and pay expenses. 
 

Page 11 GAO-14-28 Fiscal Exposures

of an insured event, and the payment of claims may extend over several 

decades. Rather, the cost of pension insurance can be measured by the 

portion of risk assumed by the government that is not charged to the 

beneficiary—a “missing premium.”

18 This subsidy is not recognized in the 

budget when the insurance is extended.

The current budget treatment results in both incomplete information with

regard to any missing premium, and in potentially misleading information 

about the program’s financial condition. For example, at the time budget 

decisions were being made for fiscal year 2013, the budget showed a 

positive budget estimate (i.e., net revenues) for PBGC of about $1.6 

billion, suggesting that the program would help decrease the federal 

budget deficit that year. However, the financial reports available at the 

same time showed the program’s net position worsened by about $8 

billion from the year before, principally as the result of incurred losses that 

are not yet reflected in the budget. These estimates provide significantly 

different pictures of the program’s health and its potential draw on future 

budget resources. While PBGC can legally only pay claims up to the 

amount of resources available in its revolving funds, in the face of major 

pension fund failures there might be an expectation that the government 

would pass legislation allowing PBGC to cover some or all of the gap.19

Dedicated resources are estimated to be insufficient to pay for the 

associated commitment. Some programs set aside amounts out of 

current budget authority to cover benefits earned today but payable in the 

future. For example, agency contributions and Treasury payments to 

cover military pension benefits accrued during the year are deposited in a 

budgetary trust fund; however, the trust fund balance is significantly less 

than expected future benefits payments, as measured by the accrued 

liability (see appendix I, figure 9). As such, the trust fund’s balance can 

 

18For more information on this concept, see GAO/AIMD-97-16 or GAO, Budget Issues: 

Budgeting for Federal Insurance Programs, GAO/T-AIMD-98-147 (Washington, D.C.: Apr. 

23, 1998).

19PBGC operates two insurance programs—one for single employer plans and another for 

multiemployer plans, which are created by collective bargaining agreements and include 

more than one employer. Operations are financed by premiums, assets from terminated 

plans, and investment income. While the single employer program is supported by both 

premiums and an asset base, the multiemployer program is supported mainly by 

premiums and a relatively small asset base. Because of long-term challenges related to 

PBGC’s governance and funding structure, PBGC’s financial future is uncertain. See 

GAO, High-Risk Series: An Update, GAO-13-283 (Washington, D.C.: Feb. 2013).
 

Page 12 GAO-14-28 Fiscal Exposures

provide a signaling function of future spending but does not necessarily 

represent the full cost of those legal commitments.20

Furthermore, some insurance programs do not have sufficient dedicated 

resources to cover expected costs. For example, the NFIP historically 

insured many properties at a subsidized rate.21 In addition, overall flood 

insurance premiums were designed to permit the program to cover losses 

and expenses in an “average historical loss year,” but not to cover highloss years. Instead, the program was given the authority to borrow from 

the Treasury in such years, with the expectation that low-loss years would 

allow the program to repay any borrowed funds. With the exception of 

years involving catastrophes, annual losses and receipts have generally 

evened out since 1978, but NFIP has been unable to repay the amounts 

borrowed in response to catastrophic events, such as Hurricane Katrina 

in 2005. This funding structure is one of the reasons the program was 

added to our High Risk List in 2006.22

Increasing amounts of future spending may be required or expected 

based both on recent trends and events—and on the government’s 

response to those events. For example, weather-related events have 

cost the nation tens of billions of dollars in damages over the past 

decade. The exposure from weather-related events increases with 

changes in population density as well as increased frequency and 

severity of the events. This is one reason we added the federal 

government’s fiscal exposure created by climate change to our 2013 High 

Risk List.23 Through federal programs like flood and crop insurance, these 

events pose significant financial risks for the federal government.

 

20GAO, Federal Trust and Other Earmarked Funds: Answers to Frequently Asked 

Questions, GAO-01-199SP (Washington, D.C.: Jan. 2001).

21The Biggert-Waters Flood Insurance Reform Act of 2012, Pub. L. No. 112-141, requires 

the subsidized premiums be eliminated and actuarially sound premiums phased in. 

22GAO, GAO’s High Risk Program, GAO-06-497T, (Washington, D.C.: March 15, 2006).

23GAO-13-283. 
 

Page 13 GAO-14-28 Fiscal Exposures

Given the variation in fiscal exposures, when making budget decisions, a 

uniform, across-the-board approach to make fiscal exposures more 

apparent may not be appropriate. Several factors need to be taken into 

account in selecting an approach to better recognize fiscal exposures in 

the budget: the extent of the government’s legal commitment; the length 

of time until the resulting payment is made; and the extent to which the 

magnitude of the exposure can be reasonably estimated. We previously 

recommended to OMB and Congress two general approaches: reporting 

supplemental information in budget documents to increase attention to 

fiscal exposures, and incorporating costs into primary budget data to 

allow for better comparisons among programs.

Supplemental reporting involves including information about the financial 

state of programs in addition to that which is available in primary budget 

data. Improved supplemental reporting in budget documents on fiscal 

exposures would make information more accessible to policymakers 

without introducing additional complexity and uncertainty directly into the 

budget. With a supplemental reporting approach, the current basis of 

reporting primary budget data would not be changed. Instead, the 

supplemental information would be used along with budget data to 

identify important signals that could be used to monitor fiscal exposures. 

For example, the Appendix Volume in the President’s budget includes a 

balance sheet for some federal insurance programs that shows the 

program’s net position (assets minus liabilities), providing valuable 

information about the program’s affect on future budget resources. For 

the Federal Crop Insurance budget account, a supplemental table 

includes the cost of the premium subsidy provided by the government. In 

2003, we recommended that OMB create an annual report on fiscal 

exposures providing a concise list and description of such exposures, 

cost estimates (where possible), and an assessment of methodologies 

and data used to produce cost estimates for such exposures. We further 

recommended that OMB report estimated costs of certain exposures as a 

new budget concept—”exposure level”—as a notational item in the 

Program and Financing schedule of the President’s budget, though the 

recommendation was not implemented.

In some cases, improving supplemental reporting in key budget 

documents may simply be a matter of expanding program analysis and 

making existing analytical work more readily available. For example, CBO 

regularly prepares 10-year budget projections for several programs in our 

review. While this time period is helpful for many programs, longer-term 

projections would be helpful for those programs—such as federal 

Approaches to Better 

Recognize the 

Programs that Create 

Fiscal Exposures in 

the Budget

Reporting Supplemental 

Information Can Increase 

Attention to Fiscal 

Exposures 
 

Page 14 GAO-14-28 Fiscal Exposures

employee pensions and retiree health—where the time between the legal 

commitment and payments can extend over several decades. Further, 

significant changes in expected spending (or differences between actual 

and estimated spending) should prompt analysis, including consideration 

of the nature and source of the change.

Identifying meaningful measures that would provide signals about the 

changing nature or magnitude of the exposure might offer another means 

to focus policymaker attention on fiscal exposures. For example, trust 

fund balances can serve as a signaling function for decision makers 

about underlying fiscal imbalances in covered programs.24 A gap between 

the projected fund balance and expected spending can signal that the 

fund, either by design or because of changes in circumstances, is 

collecting insufficient monies to finance future payments. Also, the 

repeated use of borrowing authority25 could be an indicator that the 

magnitude of the exposure has changed. Specifically, NFIP was expected 

to borrow in “above-average claim” years and repay that borrowing in 

“below-average claim” years. In years with extraordinarily high claims 

resulting from catastrophes like Superstorm Sandy and Hurricane Katrina, 

NFIP has used the borrowing authority repeatedly. The program currently 

has an outstanding debt to the Treasury of $24 billion. The program’s 

inability to cover claims in excess of premiums led to the passage of 

legislation in 2012 that altered the design of the program, including a key 

provision that NFIP raise premium rates to reflect true flood risk and make 

the program more financially stable.26 These signaling devices can 

provide policymakers with information regarding the full costs involved in 

budget decisions and enable those concerned about exposures to raise 

questions and challenges in the budget debate and to prompt action.

 

24GAO-01-199SP. 

25Borrowing authority permits an agency to borrow money, usually from the Treasury, then 

obligate against amounts borrowed.

26Biggert-Waters Flood Insurance Reform Act of 2012, Pub. L. No. 112-141, § §100205, 

100207.
 

Page 15 GAO-14-28 Fiscal Exposures

A second potential approach to improving recognition of fiscal exposures 

is incorporating full costs into primary budget data. This method would 

allow for better comparisons among competing priorities and between 

different methods for achieving program goals. In certain cases, including 

credit programs and government employee pensions, accrual accounting 

methods are already used to some extent in budgeting. For example, 

credit reform in 1990 permitted more accurate comparisons among direct 

loans, loan guarantees, and other types of tools for achieving a program’s 

objectives. Some other countries, such as Canada and Iceland, also use 

accrual budgeting selectively to increase recognition of future cash 

requirements related to service provided during the year; officials from 

these countries generally said that accrual budgeting contributed to 

improved resource allocation and program management decisions in 

these specific areas. We have recommended that Congress expand the 

use of accrual budgeting to other budget program areas where it would 

enhance upfront control, such as insurance and environmental liabilities.

27

While it has not been expanded to these areas, proposals addressing 

broader budget process reform have included accrual budgeting. As seen 

in the implementation of credit reform, including estimates of full costs in 

primary data may also lead to the development of better estimates of 

future spending, though it would require the development of 

methodologies appropriate to the nature of the exposure.

Because the cost to the government varies according to the specific 

program’s design and characteristics, different types of cost estimates 

could be incorporated into primary budget data in order to better 

recognize the government’s fiscal exposure. For example,

• Normal cost: For retirement benefit programs, such as pension or 

retiree health, the normal cost is the actuarial present value of the 

benefits to be paid in the future that are attributable to employees’ 

current year of service. As such, it is one measure of an accrual cost 

for a particular year.

 

27GAO-08-206. Other countries we reviewed—Australia, New Zealand, the Netherlands, 

and United Kingdom—use accrual budgeting more extensively to support broader efforts 

to improve the efficiency and performance of the public sector. However, none of these 

other countries used accrual budgeting for social insurance programs. 

Incorporating the Full 

Costs of Legal 

Commitments Incurred 

Today into Primary Budget 

Data Would Allow for 

Better Comparisons 

among Programs
 

Page 16 GAO-14-28 Fiscal Exposures

• Risk-assumed cost estimates:28 For insurance programs, key 

information is whether premiums will be sufficient to pay for covered 

losses under existing policies. The portion of risk assumed by the 

government that is not charged to the beneficiary—the “missing 

premium” or subsidy cost—is essentially the difference between some 

measure of the full premium and the actual premium charged to the 

insured. This cost measure has been used since 1991 for credit 

programs.

All estimates of future spending introduce some degree of additional 

uncertainty into the budget and the ease of implementation differs. Some 

measures may already be used widely in other forms of reporting, 

whereas others are relatively new concepts for federal budget reporting 

and may involve developing new models and technical skills. Despite any 

implementation challenges, approximate estimates of the full cost to 

government may be preferable to some current measures that are 

incomplete or potentially misleading. Further, a requirement to produce 

estimates for budget reporting may help improve the quality of estimates 

by drawing more attention to them. Although using estimates may 

introduce uncertainty in primary budget data, it would result in earlier cost 

recognition in the budget. This would help reinforce up-front controls in 

the budget process.

Over the past decade, the magnitude of some fiscal exposures has grown 

and the extent of the government’s commitment for some exposures has 

changed due to events and trends and the government’s response to 

them. These fiscal exposures will require future federal spending and will 

absorb resources available for other activities. The federal budget both 

allocates and controls resources, but does not provide complete 

information about some significant fiscal exposures. Therefore, we 

continue to support many past recommendations to improve budget 

recognition of these fiscal exposures, both to increase the attention given 

to them and also to allow for more comparable cost information for 

decision makers to consider when determining the best way to achieve 

various policy goals or to design a program. Expanding the availability 

and use of supplemental information—including measures that can signal 

the significant changes in the magnitude and nature of fiscal exposures 

 

28The risk assumed can be difficult to measure for many federal activities, but is most 

clearly identifiable in federal insurance programs. 

Concluding 

Observations 
 

Page 17 GAO-14-28 Fiscal Exposures

facing the federal government—would be an important first step toward

enhancing control and oversight over federal resources and can aid in 

monitoring the financial condition of programs over the longer term. 

Incorporating measures of the full cost into primary budget data would 

provide enhanced control over future spending. This can both improve the 

nation’s fiscal condition and enhance the budgetary flexibility for 

responding to unexpected or emerging challenges.

We provided a draft of this report to the Office of Management and 

Budget and the agencies responsible for administering the programs we 

reviewed. Those agencies are the Risk Management Agency (RMA) in 

the Department of Agriculture; the Federal Housing and Finance 

Administration; Department of Defense (DOD); Department of Homeland 

Security (DHS); Department of Veterans Affairs (VA); the Office of 

Personnel Management; and the Pension Benefit Guaranty Corporation 

(PBGC). RMA, DOD, PBGC, and the Federal Emergency Management 

Agency in DHS provided technical comments that were incorporated in 

the report as appropriate. The Chief of Staff of VA provided comments 

that are discussed below and reprinted in appendix II.

VA generally agreed with our findings and stated that current budget 

reporting provides adequate information for determining the resources 

necessary to pay benefits for current veterans and survivors. While we 

agree that the budget records the outlays associated with benefits paid in 

a given year, we maintain that current budget reporting provides 

incomplete information about the costs incurred for benefits earned during 

the year that will be paid in the future.

We are sending this report to relevant agencies and congressional 

committees. In addition, the report is available at no charge on the GAO 

website at http://www.gao.gov. 

If you or your staff have any questions about this report please contact 

me at (202) 512-6806 or irvings@gao.gov. Contact points for our Offices 

Agency Comments

and Our Evaluation
 

Page 18 GAO-14-28 Fiscal Exposures

of Congressional Relations and Public Affairs may be found on the last 

page of this report. GAO staff who made key contributions to this report 

are listed in appendix III. 

Sincerely yours,

Susan J. Irving

Director for Federal Budget Analysis

Strategic Issues
Appendix I: Information on Selected Fiscal 

Exposures

Page 19 GAO-14-28 Fiscal Exposures

This appendix describes the extent and estimated magnitude of the fiscal 

exposure created by nine programs:

• federal crop insurance;

• national flood insurance;

• pension insurance;

• stock purchase agreements with Fannie Mae and Freddie Mac;

• civilian pension benefits;

• civilian post-retirement health benefits;

• military pension benefits;

• military post-retirement health benefits; and

• veterans compensation.

Appendix I: Information on Selected Fiscal 

Exposures 
Appendix I: Information on Selected Fiscal 

Exposures

Page 20 GAO-14-28 Fiscal Exposures

Farming has always been vulnerable to risks from natural causes such as 

drought, excessive moisture, hail, wind, frost, insects, and disease. 

Farmers are also exposed to financial losses from price risk. The federal 

government helps mitigate the impact of these risks on farm income 

through the federal crop insurance program. Crop insurance is sold and 

serviced by 17 approved private companies. Under the provisions of 

these agreements, the private companies both bear a percentage of any 

loss and reap a percentage of any gain associated with the policies over 

the course of the year. The federal government subsidizes the premiums 

paid by farmers and acts as primary reinsurer for the private companies 

that underwrite the policies. The federal government also makes 

payments to insurance companies that are intended to cover 

administrative expenses for selling and servicing crop insurance policies. 

Federal crop insurance is not intended to be self-financing through 

premiums; a permanent, indefinite appropriation covers any payments 

that are needed to cover losses and other expenses.

The government’s legal commitment to pay crop insurance policyholder 

claims when losses occur makes the program an explicit exposure. The 

amount of federal spending resulting from this exposure depends on the 

extent of losses incurred by farmers.

The federal crop insurance program’s costs increased sharply in recent 

years. An indicator of the government’s exposure is the increase in 

appropriations drawn from the general fund,1 which have grown from $3.4 

billion in fiscal year 2001 to $7.6 billion in fiscal year 2012 as shown in 

figure 3.

 

1We use the term general fund to refer to the account in the U.S. Treasury holding all 

federal money not allocated by law to any other fund account and from which 

appropriations are generally drawn.

Federal Crop 

Insurance 

Background 

Extent and Estimated 

Magnitude of the Exposure
Appendix I: Information on Selected Fiscal 

Exposures

Page 21 GAO-14-28 Fiscal Exposures

Figure 3: Federal Crop Insurance Corporation, Outlays and Resources, Fiscal Years 

2001 through 2012

Note: Data from the President’s Budget Appendix. General fund amounts, collections, and outlays 

from the Program and Financing Schedule. Amounts received by the Crop Insurance Corporation 

through the general fund are appropriated and represent premium subsidies as authorized by section 

508(b) of the Federal Crop Insurance Act, as amended. Collections primarily come from premiums 

paid by farmers. Outlays primarily represent payments for indemnities to insured farmers and 

administrative expenses for approved insurance providers.

Figure 3 shows outlays and resources available to the program, the 

combination of the general revenue funds, and collections (primarily 

premiums) received. Outlays, which reflect claims payments and other 

associated costs, doubled from $3 billion in 2001 to $6 billion in 2008, and 

then doubled again in 2009 to $12 billion. Premiums received do not fully 

cover the program’s costs; general revenue funds make up more than 

half of the program’s available resources and are used in part to provide 

premium and administrative expense subsidies. Therefore, the full cost of 

the crop insurance subsidies and administrative costs is reflected in the 

budget.

Budget Treatment of the 

Exposure 
Appendix I: Information on Selected Fiscal 

Exposures

Page 22 GAO-14-28 Fiscal Exposures

Anticipating the future budget exposure presented by crop insurance is 

complicated by the potential impact of climate change and changes in 

program design. Our March 2007 report assessing the financial risks to 

the Federal Crop Insurance Corporation (FCIC) found that its exposure to 

weather related losses had grown substantially. At that time, we found 

that little had been done to develop the kind of information needed to 

understand FCIC’s long-term exposure to climate change and that FCIC 

had not analyzed the potential impacts of an increase in the frequency or 

the severity of weather-related events on its operations. Since then, a 

study examining the potential impact of climate change on the federal 

crop insurance program was prepared for the Risk Management Agency 

(RMA), which administers the program. According to RMA officials, the 

overall impact of climate change is not clear, given the uncertainty of 

various climate change scenarios and the potential adaptive responses 

by growers and the crop insurance program. Reflecting these 

uncertainties and the significance of this issue, we included a discussion 

of the crop insurance program in a high risk designation related to the

fiscal exposure of climate change in our High Risk List in 2013.2

 

2GAO-13-283. 

Key Factors to Consider
Appendix I: Information on Selected Fiscal 

Exposures

Page 23 GAO-14-28 Fiscal Exposures

The Federal Emergency Management Agency (FEMA) within the 

Department of Homeland Security operates the National Flood Insurance 

Program (NFIP) to provide flood insurance to residential and commercial 

property owners. Flood insurance is funded primarily through premium 

collections. The premiums were designed to permit the program to cover 

losses and expenses in an “average historical loss year,” but not to cover 

high-loss years. Instead, the program has statutory authority to borrow 

from the Treasury in such years with the expectation that low-loss years 

would allow the program to repay any borrowed funds. While not always 

the case, since 1978 annual losses have generally evened out with 

receipts over normal years but borrowing authority has been accessed 

and increased in recent years, in response to catastrophic events such as 

Hurricane Katrina in 2005.

NFIP presents a range of exposures to the federal government. The 

government’s legal commitment to pay flood insurance policyholder 

claims when losses occur makes the program an explicit exposure. The 

amount of federal spending resulting from this exposure depends, in part,

on the frequency of weather-related events and their severity. If total 

claims exceed amounts available from premium collections, NFIP may 

access available borrowing authority to cover excess claim amounts. To 

the extent there is an expectation that the federal government cover 

claims exceeding the amount that NFIP has been authorized to borrow 

from the Treasury, NFIP represents an implicit exposure. NFIP received 

increased borrowing authority in 2013 to cover loss claims related to 

Superstorm Sandy. Including the $16.8 billion NFIP borrowed to cover 

claims primarily from Katrina, the program’s reported total outstanding 

debt had increased to $24 billion as of March 31, 2013.

One measure of the government’s exposure is the extent to which claims 

exceed available resources. One indicator of the exposure is NFIP’s net 

position—the residual difference between the program’s total assets and 

National Flood 

Insurance 

Background 

Extent and Estimated 

Magnitude of the Exposure
Appendix I: Information on Selected Fiscal 

Exposures

Page 24 GAO-14-28 Fiscal Exposures

liabilities.3 NFIP’s liabilities include outstanding debt to the Treasury. As 

shown in figure 4, the program’s reported net position declined 

dramatically from fiscal year 2006 to fiscal year 2007 as NFIP borrowed 

from the Treasury to pay claims related to Hurricane Katrina. At the end 

of fiscal year 2012, the program’s net position was negative $19 billion; 

this did not reflect the additional borrowing in 2013.

Figure 4: National Flood Insurance Receipts, Outlays, and Net Position, Fiscal 

Years 2001 through 2012

Note: Data from the President’s Budget Appendix. Receipts and outlays from the Program and 

Financing Schedule; GAO analyzed supplemental balance sheet information on assets and liabilities 

to determine the net position.

 

3The President’s Budget Appendix reports supplemental information for federal insurance 

programs, including a balance sheet for NFIP. NFIP’s net position is recorded in the 

balance sheet.
Appendix I: Information on Selected Fiscal 

Exposures

Page 25 GAO-14-28 Fiscal Exposures

Figure 4 also shows how the program is reflected in primary budget data. 

NFIP is reflected on a cash basis: premium collections are recorded as 

receipts in the year they are received and claims payments are recorded 

as outlays in the year they are made. The balance sheet for NFIP is also 

included in the budget as supplementary information. However, the 

budget has not reflected the subsidy cost—or “missing premium”—

embedded in NFIP’s program design. The subsidy can be measured as 

the portion of risk assumed by the government that is not charged to the 

beneficiary.

NFIP was first added to our High Risk List in 2006 because of concerns 

about financial solvency. The program was highlighted again in 2013 

when we added the fiscal exposure of climate change to the High Risk 

List.

4 In 2007, we found that more information was needed to understand 

and manage the program’s long-term exposure to climate change and

analyze the potential effects of an increase in the frequency or in the 

severity of weather-related events on their operations, which in turn 

affects the fiscal exposure to the government. In June 2013, AECOM 

released a FEMA-sponsored study to investigate the potential impacts of 

climate change and population growth on the NFIP.5 Recent legislation 

may address some of these concerns. In 2012, NFIP was required to set 

actuarially sound premium rates and phase out the premium subsidy on 

certain properties, as well as establish a reserve fund to cover 

catastrophic losses.6 We have reported that the financial reforms included 

in the Biggert-Waters Act could go a long way toward reducing the fiscal 

exposure created by the program, but they will be phased in over time 

and it is too early to make conclusions. 

 

4

GAO-13-283.

5

AECOM, The Impact of Climate Change and Population Growth on the National Flood 

Insurance Program Through 2100, (June 2013).

6The Biggert-Waters Flood Insurance Reform Act of 2012, Pub. L. No. 112-141. 

Budget Treatment of the 

Exposure 

Key Factors to Consider
Appendix I: Information on Selected Fiscal 

Exposures

Page 26 GAO-14-28 Fiscal Exposures

The Pension Benefit Guaranty Corporation (PBGC) is a wholly-owned 

government corporation established under the Employee Retirement 

Income Security Act of 19747 to protect the pension benefits of American 

workers. PBGC operates two insurance programs—one for single 

employer plans and another for multiemployer plans, which are created 

by collective bargaining agreements and include more than one 

employer. While the single employer program is supported by both 

premiums and an asset base, the multiemployer program is supported 

mainly by premiums and a relatively small asset base. As of the end of 

fiscal year 2012, PBGC insured the benefits for nearly 43 million workers, 

retirees, and beneficiaries participating in about 26,000 private sector 

defined benefit pension plans. PBGC is required to be self-financing and 

does not receive any funds from general revenue. It funds its operations 

through insurance premiums paid by companies that sponsor defined 

benefit pension plans, investment income, and assets from terminated 

plans. Premiums charged are set by law. PBGC’s financial activities are 

included in both the federal budget and consolidated financial statements 

of the U.S. government.

Pension insurance presents a range of exposures to the federal 

government. PBGC’s legal commitment to pay pension benefit 

guarantees when losses occur makes the program an explicit exposure

for the government.

8 While the federal government may not cover losses 

related to failed pension plans in excess of PBGC’s available resources, 

the extent to which there is an expectation (under some circumstances) 

that the federal government would step in and change the law to make all 

or some of such payments represents an implicit exposure.9

 

7Pub. L. No. 93-406, § 4002(a)

8Generally speaking, a claim occurs when a plan sponsor with an underfunded plan goes 

bankrupt and the plan is terminated.

9

Congress recently repealed section 4005(c) of the Employee Retirement Investment 

Security Act, which provided authority for the PBGC’s federal line of credit up to $100 

million. See the Moving Ahead for Progress in the 21st Century Act (MAP-21), Pub. L. No. 

112-141, § 40234 (a).

Pension Insurance

Background 

Extent and Estimated 

Magnitude of the Exposure
Appendix I: Information on Selected Fiscal 

Exposures

Page 27 GAO-14-28 Fiscal Exposures

One measure of the magnitude of the government’s fiscal exposure is 

PBGC’s net position, which represents the residual difference between 

PBGC’s total assets and liabilities. As figure 5 shows, PBGC’s net 

position generally declined from a $7.8 billion surplus in 2001 to a $34 

billion deficit in fiscal year 2012. However, PBGC estimated that its 

financial risk for potential termination of underfunded plans sponsored by 

financially weak firms to be almost $300 billion. Although PBGC’s annual 

receipts currently exceed its outlays, its overall financial position is 

weaker than would be indicated by these annual receipts and outlays.

Figure 5: Pension Benefit Guaranty Corporation Net Position and Revolving Fund 

Cash Flows, Fiscal Years 2001 through 2012

Notes: Receipts and outlays from the President’s Budget Appendix. Net position from PBGC’s 

financial reports.

PBGC is an example of a program for which cash-based budgeting 

provides potentially misleading information. Premiums are shown as 

receipts when they come into the Treasury and payments are shown as 

outlays when they are made; the time lag between these events means 

that an increase in PBGC premiums would appear in the budget as an 

Budget Treatment of the 

Exposure 
Appendix I: Information on Selected Fiscal 

Exposures

Page 28 GAO-14-28 Fiscal Exposures

increase in revenues. The budget does not reflect the “missing 

premium”—the portion of a full risk-based premium not charged to the 

insured, which could be a signal of the expected cost of the program.

In 2013, we reported that plan terminations and insolvencies threaten 

PBGC’s ability to pay pension guarantees for retirees. In the event that

the agency were to exhaust all of its assets and become insolvent, the 

agency would only have premium revenue to rely on to make its benefit 

payments.10 As a consequence, PBGC would be forced to seek additional 

federal funding, dramatically cut benefit payments to participants, or ask 

Congress to raise premiums significantly to meet its benefit 

commitments.11 We, along with PBGC, have expressed concerns that the 

current level of premiums and assets will not be sufficient to cover 

expected claims in the future.12 PBGC has been on our High Risk List 

since 2003. Because of long-term challenges related to its governance 

and funding structure, PBGC’s financial future is uncertain. While 

Congress and PBGC have taken steps in recent years to address these 

challenges, PBGC continues to face the risk of significant increases in 

liabilities and inadequate sources of revenue to finance future claims.

 

10For further discussion, see GAO, Private Pensions: Timely Action Needed to Address 

Impending Multiemployer Plan Insolvencies, GAO-13-240, (Washington, D.C.: Mar. 28, 

2013).

11GAO, Pension Benefit Guaranty Corporation: Redesigned Premium Structure Could 

Better Align Rates With Risk From Plan Sponsors, GAO-13-58, (Washington, D.C.: Nov. 

7, 2012) and Pension Benefit Guaranty Corporation, Excellence in Customer Service: 

Annual Report 2012, (Washington, D.C.: Nov.14, 2012). 

12GAO-13-58. 

Key Factors to Consider
Appendix I: Information on Selected Fiscal 

Exposures

Page 29 GAO-14-28 Fiscal Exposures

Congress established Fannie Mae and Freddie Mac as governmentsponsored enterprises (GSEs) in the housing finance market to support 

the supply of mortgage loans; securities issued by these GSEs were not 

backed by the full faith and credit of the government. In 2008, in response 

to the financial crisis, Treasury entered into Senior Preferred Stock 

Purchase Agreements (the agreements) with Fannie Mae and Freddie 

Mac to preserve the assets and mitigate systemic risks that contributed to 

market instability. Under the agreements, Treasury would purchase these 

GSEs’ senior preferred stock and make funds available on a quarterly 

basis, to be recovered by redemption of the stock or by other means. 

While the initial funding commitment for each enterprise was capped at 

$100 billion, Treasury increased the cap to $200 billion per GSE in May 

2009 to maintain confidence in these GSEs. In 2012, the caps were 

replaced with a formulaic cap allowing these GSEs to make quarterly 

draws based upon their net position, or if the liabilities of either GSE, 

individually, exceed its respective assets.

The purchase agreements with Fannie Mae and Freddie Mac illustrate 

how an exposure can change over time. Prior to 2008, these GSEs 

represented an implicit fiscal exposure to the government because the 

securities they issued were explicitly not guaranteed by the full faith and 

credit of the U.S. government. The 2008 stock purchase agreements, 

while temporary, created a new explicit exposure for the federal 

government to provide immediate financial support to Fannie Mae and 

Freddie Mac. At the end of any quarter in which either Fannie Mae’s or 

Freddie Mac’s balance sheet reflects that total liabilities exceed total 

assets, the GSEs have 15 business days to request funds under the 

terms of the agreements. Treasury then has 60 days to provide the funds, 

as necessary, up to the maximum amount of the funding commitment. 

The federal government is not obligated to provide additional assistance 

beyond the scope of the agreements, but the government’s response may 

influence expectations related to future support. This expectation 

represents an implicit exposure.

Stock Purchase 

Agreements with 

Fannie Mae and 

Freddie Mac

Background 

Extent and Estimated 

Magnitude of the Exposure
Appendix I: Information on Selected Fiscal 

Exposures

Page 30 GAO-14-28 Fiscal Exposures

One measure of the magnitude of the exposure to the government is the 

liability reported in the 2012 Financial Report of the United States 

Government (Financial Report) of $9 billion, reflecting Treasury’s best 

estimate at the time of likely draws over the remaining duration of the 

agreements. The liability was significantly reduced in 2012 (see figure 6). 

This reduction was in part due to a revision to the agreements that is 

expected to reduce the amount of future draws, and also to the improved 

housing market, which contributed positively to the GSEs financial results. 

Another possible measure of the exposure is the remaining draw authority 

available to these GSEs, which was about $258 billion as of January 1, 

2013. This represents the maximum amount of future spending under the 

current agreement. In considering the exposure under either measure, 

any amounts received related to the federal government’s investment in 

the GSEs’ stock—which had a reported fair value of $109.3 billion in the 

2012 Financial Report— would reduce the federal government’s 

exposure.

Figure 6: Treasury Agreements with Fannie Mae and Freddie Mac, Fiscal Years 2008 

through 2012
Appendix I: Information on Selected Fiscal 

Exposures

Page 31 GAO-14-28 Fiscal Exposures

Note: Treasury payments to GSEs based on data from the President’s Budget Appendix. Contingent 

liabilities from the Financial Reports. Dividends and draw authority balances based on data from 

Fannie Mae and Freddie Mac.

Figure 6 also shows the Treasury payments to these GSEs and draw 

authority balance at the end of the year as recorded in primary budget 

data. The Administration considers Fannie Mae and Freddie Mac to be 

outside of the budget; therefore payments to them are recorded as 

outlays. Since 2008, Fannie Mae and Freddie Mac have drawn a total of 

$187.5 billion and draws have decreased each year—from a high of 

$95.6 billion in fiscal year 2009 to $18.5 billion in fiscal year 2012. The 

draw authority balance remaining at the end of each fiscal year is 

reflected as an unobligated balance.

Under the terms of the agreements, the cost of the government’s 

commitment is offset by dividend payments from these GSEs to 

Treasury.13 As figure 6 shows, in fiscal year 2012 Treasury made 

payments to these GSEs of $18.5 billion but these GSEs made $18.4

billion in dividend payments to the Treasury. Including $14.6 billion in 

dividend payments due as of September 2013, the aggregate dividend 

payments to Treasury from Fannie Mae and Freddie Mac totaled about 

$146 billion.

We, federal regulators, researchers, and others have long argued that, 

despite the federal government explicitly not guaranteeing the 

enterprises’ debt or including them in the federal budget, Fannie Mae and 

Freddie Mac had financial incentives to engage in risky business 

practices to strengthen their profitability in part because of the financial 

benefits derived from an implied federal guarantee on their financial 

obligations. In 2009, we reported that excluding Fannie Mae and Freddie 

Mac from federal budget totals leads to limited transparency about these 

GSEs’ risks and potential costs to taxpayers.14 This is in contrast to the 

budget treatment for direct federal loan and loan guarantee programs, 

 

13Dividends received by Treasury under this agreement are reflected in the general fund. 

14GAO, Fannie Mae and Freddie Mac: Analysis of Options for Revising the Housing 

Enterprises’ Long-term Structures, GAO-09-782, (Washington, D.C.: Sept. 10, 2009).

Budget Treatment of the 

Exposure 

Key Factors to Consider
Appendix I: Information on Selected Fiscal 

Exposures

Page 32 GAO-14-28 Fiscal Exposures

which record associated costs in the federal budget.15 The future 

structures of these two GSEs and the roles they will serve in the 

mortgage market must still be determined and will affect future decisions 

about budget treatment.

 

15Pub. L. No. 101-508. Under the Federal Credit Reform Act of 1990, the credit subsidy 

cost of direct loans and loan guarantees is the net present value of the estimated longterm cost to the government at the time the credit is provided of such programs, less 

administrative expenses. The act was intended to improve disclosures about the risks 

associated with government direct loans and guarantee programs and assist Congress in 

making budget decisions about such programs.
Appendix I: Information on Selected Fiscal 

Exposures

Page 33 GAO-14-28 Fiscal Exposures

Most federal civilian employees are covered by one of two pension plans, 

depending largely on when they began their federal service: those hired 

before 1984 are covered by the Civil Service Retirement System (CSRS) 

while most employees who entered federal service after 1983 are 

covered by the Federal Employee Retirement System (FERS).16 The 

difference between the design and structure of these two plans affects the 

extent and magnitude of the fiscal exposure each presents to the 

government.

CSRS is a stand-alone defined benefit plan enacted in 1920.17 CSRS 

employees do not pay Social Security payroll taxes and they do not earn 

Social Security benefits for their CSRS-covered service.18 FERS has a 

small defined benefit portion—the FERS annuity—which supplements 

Social Security, and a voluntary defined contribution portion, the Thrift 

Savings Plan (TSP).19 Defined contribution plans do not represent a fiscal 

exposure to the government because benefits in retirement are based on 

contributions and investment returns in these accounts. The analysis in 

this report covers CSRS and the FERS annuity—the defined benefit 

 

16CSRS was authorized by the Civil Service Retirement Act of 1920 (Pub. L. No. 66-215) 

and FERS was established by the Federal Employees’ Retirement System Act of 1986 

(Pub. L. No. 99-335).

17In a defined benefit plan, the retirement benefit typically is based on a formula specified 

in the plan, which will often be based on factors such as an employee’s years of service, 

age at retirement, and wages or salary. For a civilian employee retiring after 30 years of 

federal service, a CSRS annuity will be equal to 56.25 percent of the average of the 

highest three consecutive years of basic pay. A FERS employee retiring at the age of 62 

with 30 years of service will receive a FERS annuity equal to 33 percent of the average of 

the highest three consecutive years of pay.

18Some CSRS employees will have paid or will pay Social Security for employment 

outside the federal government.

19The TSP is a defined contribution retirement plan similar to the 401(k) plans provided by 

many employers in the private sector. The income that a retired worker receives from the 

TSP will depend on the balance in his or her account. Contributions of up to 5 percent of 

pay made by FERS employees are matched by the federal government. CSRS employees 

can contribute to the TSP, but they receive no matching contributions. The TSP is nonbudgetary and agency matching contributions are recorded as outlays.

Civilian Pension 

Benefits 

Background 
Appendix I: Information on Selected Fiscal 

Exposures

Page 34 GAO-14-28 Fiscal Exposures

portion of FERS—which constitutes the government’s exposure arising 

from the two civilian pension plans.

Both agency and employee contributions toward CSRS and the FERS 

defined benefit annuity are paid to the Civil Service Retirement and 

Disability Fund (CSRDF), the trust fund in the budget dedicated to funding 

civilian pension benefits. The CSRDF also receives some payments from 

the Treasury’s general fund account (largely intended to amortize and pay 

interest on the previously accumulated CSRS liability) and the CSRDF is 

credited with interest (investment income) on the Treasury securities it 

holds.20

Civilian pension benefits are explicit exposures because the government 

has a legal commitment to pay pension benefits earned by current 

employees who will receive benefits in the future and retirees who 

currently receive benefits.

From a government-wide perspective, the magnitude of the exposure can 

be estimated by the accrued liability for defined benefit civilian pensions, 

which at the end of fiscal year 2012 was estimated to be $1.8 trillion, up 

from $1.2 trillion in 2001. Most of the accrued pension liability is the cost 

of CSRS and FERS benefits earned but not yet paid to date.21 The 

composition of the civilian pension liability has changed and will continue 

to change over time because the extent and magnitude of the 

government’s exposure are different for CSRS and FERS. This reflects 

both the transition from CSRS to FERS in the mid 1980s, and the 

differences in their benefit structure.

• Since employees hired after 1984 are covered by FERS, that liability 

is growing faster than the CSRS liability, which should diminish as 

 

20All CSRDF investments are in U.S. Treasury and Federal Financing Bank securities and 

are therefore classified as intragovernmental. The government does not set aside assets 

to pay future benefits or other expenditures associated with designated funds. Throughout 

this report, we refer to all funds generated through the investment of assets as investment 

income.

21According to the 2012 Financial Report, other significant civilian pension plans include 

those of the Coast Guard, Foreign Service, Tennessee Valley Authority, U.S. Postal 

Service, and the Department of Health and Human Services.

Extent and Estimated 

Magnitude of the Exposure
Appendix I: Information on Selected Fiscal 

Exposures

Page 35 GAO-14-28 Fiscal Exposures

more CSRS employees retire and the vast majority of the civilian 

workforce is covered by FERS.22

• The CSRS liability is greater largely due to the difference in size of the 

benefit, not the number of participants. Specifically, the cost to the 

government for CSRS is greater than for FERS, which provides a 

smaller defined benefit plan that is augmented by Social Security and 

the TSP.23

• Although agencies and employees both make contributions for CSRS, 

it was largely designed as a pay-as-you-go program. Agency and 

employee contributions were not set at a level to cover the full cost of 

benefits as they are earned—even with investment income.24 CSRS 

employee and agency contributions are each set at 7 percent of pay 

for a total 14 percent contribution. However, for fiscal year 2012, the 

Office of Personnel Management (OPM) estimated that the amount 

required to fully fund future CSRS benefits—the normal cost—is 32 

percent of pay.25

• The FERS defined benefit annuity is designed to be fully funded by 

employee and agency contributions and investment income. Agency 

 

22FERS currently covers the majority of active civilian employees. As of fiscal year 2012, 

there were 323,000 active employees covered by CSRS compared to 2,493,000 active 

FERS employees. 

23According to the Congressional Budget Office, in fiscal year 2012 the average monthly 

benefit for FERS annuitants was $1,147 compared to an average monthly benefit of 

$3,123 for CSRS annuitants. Congressional Budget Office, March 2012 Baseline for the 

Civil Service Retirement and Disability Fund.

24The U.S. Postal Service is an exception. Separate CSRS funding provisions were 

enacted under Pub. L. No. 108-18, requiring the Postal Service to contribute the normalcost percentage to CSRS, which means the entry-age normal cost computed by the Office 

of Personnel Management in accordance with generally accepted actuarial practice and 

standards (using dynamic assumptions) and expressed as a level of percentage of 

aggregate basic pay. The Postal Service was also required to finance any unfunded 

liabilities. Under the Postal Accountability and Enhancement Act, Pub. L. No. 109-435, the 

Postal Service, beginning in 2017, must amortize any additional unfunded actuarial 

liabilities which may arise. Currently, Postal CSRS employees contribute 7 percent of pay.

25Normal cost, an actuarial concept used in pension and other post-retirement benefit cost 

calculations, is the discounted present value of the cost to pay benefits in the future 

attributable to employees’ current year of service. If the normal costs for specific 

beneficiaries are accumulated during all years of service in which benefits are earned, and 

all actuarial assumptions are met, the sum accumulated will pay for the benefits as they 

come due.
Appendix I: Information on Selected Fiscal 

Exposures

Page 36 GAO-14-28 Fiscal Exposures

contributions for FERS employees are based on annual calculations 

of the amount required to fully fund future benefits (normal cost) less 

the employee contribution rate. Employee contributions are calculated 

differently for FERS than for CSRS: FERS employees essentially pay 

the difference between the CSRS employee contribution rate of 7 

percent and the Social Security employee payroll tax rate, currently 

6.2 percent, for an employee contribution rate of 0.8 percent. 

However, in 2012, the employee contribution was increased to 3.1 

percent of pay for employees hired after December 31, 2012, 

effectively reducing the agency contribution.26

The transition from CSRS to FERS and the difference in program design 

have implications for understanding the size and path of the exposure. As 

shown in figure 7, as of September 30, 2012, the CSRS accrued liability 

is estimated at $1.2 trillion and the FERS accrued liability is $484 billion. 

Because of the manner in which CSRS costs are determined and funded, 

the system has accumulated a sizeable unfunded liability.27 However, the 

unfunded liability is dealt with by the FERS Act,28 which provides for 

annual credits made to the CSRDF (out of any money in the Treasury 

general fund not otherwise appropriated) to amortize any supplemental 

liability of the CSRDF with respect to current or former federal employees. 

Figure 7 also shows the balance of the CSRDF, which grew from $543 

billion at the end of fiscal year 2001 to $820 billion at the end of fiscal 

year 2012.

 

26The Middle Class Tax Relief and Job Creation Act of 2012 (Pub. L. No. 112-96) 

provided for increased employee contributions of 3.1 percent of pay to the CSRDF for 

employees hired after December 31, 2012.

27The term “unfunded liability” has been used to refer to gaps between the projected 

financial commitment to a program or expenditure and the earmarked revenues that are 

expected to be available to fund that commitment. However, no federal obligation can be 

truly considered “unfunded” because of the government’s sovereign power to tax to meet 

its obligations. 

28Pub. L. No. 99-335
Appendix I: Information on Selected Fiscal 

Exposures

Page 37 GAO-14-28 Fiscal Exposures

Figure 7: Accrued Defined Benefit Pension Liability and Trust Fund Balance, Fiscal 

Years 2001 through 2012

Notes: Data on liabilities from OPM’s financial reports. Data on CSRDF fund balances from the 

President’s Budget Appendix.

Benefit payments for both CSRS and the FERS defined benefit annuity 

are made from the CSRDF, which has permanent, indefinite budget 

authority to pay benefits. Agencies pre-fund employee pensions by 

deferring some of their budget authority to the CSRDF, where it remains 

available to pay pensions to retired workers. The Treasury credits the 

CSRDF with budget authority in the form of special-issue securities that 

are backed by the full faith and credit of the U.S. government that earn 

interest equal to the average rate on the Treasury’s outstanding long-term 

debt. These securities are then redeemed to make payments to retirees 

and survivors.

Employee contributions to the CSRDF are recorded as receipts and count 

as revenue to the Treasury. Payments to retirees are recorded as outlays 

and affect the government-wide deficit. Agency contributions are made 

Budget Treatment of the 

Exposure 
Appendix I: Information on Selected Fiscal 

Exposures

Page 38 GAO-14-28 Fiscal Exposures

from their appropriations and so payments toward the normal cost are 

visible to the individual agency, but are not reflected in the governmentwide deficit because agency payments to the CSRDF are 

intragovernmental—that is, they are recorded as outlays by one agency 

and receipts by the trust fund. Treasury also makes annual payments to 

the CSRDF from the general fund to amortize the previously accumulated 

unfunded liability and to fund the difference between the CSRS employee 

and agency contributions and the amount that would be required to fully 

fund future CSRS benefits. Since no cash actually leaves the 

government, both agency contributions and Treasury payments to the 

CSRDF do not affect the government-wide deficit.

While the long-term exposure to the federal budget arising from civilian 

pension benefits is large, it is on a path to decline over time. This trend 

reflects both the transition from CSRS to FERS in the mid 1980s and the 

change to a defined contribution design and funding structure in FERS.

Key Factors to Consider
Appendix I: Information on Selected Fiscal 

Exposures

Page 39 GAO-14-28 Fiscal Exposures

Civilian annuitants are generally eligible to receive continued subsidized 

health benefits such as those received over the course of their working 

years. The Federal Employee Health Benefits program, implemented in 

1960, is operated through two revolving trust funds: the Employees 

Health Benefits Fund and the Retired Employees Health Benefits Fund.29

The two funds are reported jointly as the Federal Employee Health 

Benefits (FEHB) account in the federal budget. Under the FEHB program, 

the federal government pays a share of the monthly premium. The 

government shares the cost of the monthly premium with employees.30

The government’s legal commitment to pay a share of the monthly 

premium for eligible retirees makes civilian post-retirement health benefits 

an explicit exposure.

The magnitude of the exposure can be estimated by the accrued liability 

for civilian post-retirement health benefits, which at the end of fiscal year 

2012, was estimated to be $328 billion. The liability is an estimate of the 

government’s future cost of providing post-retirement health benefits to 

current employees and retirees. Figure 8 shows the exposure generally 

grew through 2010 before declining in 2011 and 2012. As is the case with 

health care costs in general, estimates depend on many factors, including 

assumptions about utilization and health care costs far into the future and 

as a result, can be difficult to estimate. These variables in turn can vary 

with changes in covered services and participants’ choice of plans.

 

29After age 65, the retirees’ FEHB benefits are coordinated with Medicare benefits. 

30The government’s share for annuitants and current employees is 72 percent of the 

weighted average of the premiums for all participating plans, with a cap of 75 percent of 

the total premium. 

Civilian PostRetirement Health 

Benefits 

Background 

Extent and Estimated 

Magnitude of the Exposure
Appendix I: Information on Selected Fiscal 

Exposures

Page 40 GAO-14-28 Fiscal Exposures

Figure 8: Accrued Liability for Civilian Post-Retirement Health Benefits, Fiscal 

Years 2001 through 2012

Notes: Data from the Financial Reports. 

The FEHB Program is classified as a mandatory program and is funded 

through a permanent indefinite appropriation. The budget reflects 

payments made in the current year for both active employees and 

retirees. Although active and retired employees pay premiums, they do 

not cover the full cost. Agencies make payments to the Employees Health 

Benefits Fund at OPM for their share of the FEHB premiums for current 

employees. However, with some exceptions, the budget does not reflect 

Budget Treatment of the 

Exposure 
Appendix I: Information on Selected Fiscal 

Exposures

Page 41 GAO-14-28 Fiscal Exposures

the estimated costs of future payments associated with the federal 

government’s active employees’ post-retirement health benefits.31

Federal health care spending as a whole has been growing faster than 

the economy and is expected to continue to do so. As such it will be 

important to find ways to minimize costs while maintaining quality for 

civilian employees and retirees.

 

31The U.S. Patent and Trademark Office is an exception; since 2005 it has made accrual 

payments to the FEHB fund associated with its active employees’ post-retirement health 

benefits. In addition, since 2006, the U.S. Postal Service is required to make scheduled 

prefunding contributions to the Postal Service Retiree Health Benefit Fund in the budget. 

However, the Postal Service has not made required payments of $11.1 billion due in fiscal 

year 2012. See GAO, U.S. Postal Service: Proposed Health Plan Could Improve Financial 

Condition, but Impact on Medicare and Other Issues Should Be Weighed Before Approval, 

GAO-13-658 (Washington, D.C., July 18, 2013) and U.S. Postal Service: Status, Financial 

Outlook, and Alternative Approaches to Fund Retiree Health Benefits, GAO-13-112

(Washington, D.C., Dec. 4, 2012).

Key Factors to Consider
Appendix I: Information on Selected Fiscal 

Exposures

Page 42 GAO-14-28 Fiscal Exposures

Members of the military are eligible for a defined benefit, noncontributory 

pension after 20 years of active service. Active duty personnel become 

eligible for retirement by completing 20 years of service, regardless of 

age.32 The military retirement system provides inflation-protected monthly 

compensation and other benefits after an active reserve or military 

career.33 The system does not provide for gradual vesting; service 

personnel who separate prior to completing the minimum 20 years of 

service generally receive no retirement benefits.34

Since 1985, the program has operated through the Department of 

Defense (DOD) Military Retirement Fund and has three sources of 

income.35 The first is payments from the military personnel accounts to 

cover most of the accruing costs of future retirement benefits being 

earned by today’s service members (i.e., the normal cost). The second 

source is investment income on Treasury Securities the fund holds. The 

third source is made up of payments from Treasury’s general fund to 

cover a portion of the normal cost and a portion of the previously 

accumulated unfunded liability, including the liability for concurrent 

 

32Members of the reserves may retire after 20 qualifying years of creditable service, but 

reserve retired pay is not payable until age 60, with some exceptions.

33Since 2001, service members also have been eligible to participate in the federal Thrift 

Savings Plan, the defined-contribution plan available to civilian employees, although 

generally without any matching contributions from the government.

34The military retirement system applies to members of the Army, Navy, Marine Corps and 

Air Force. Most of the provisions also apply to retirement systems for members of the 

Coast Guard (administered by the Department of Homeland Security), officers of the 

Public Health Service (administered by the Department of Health and Human Services), 

and officers of the National Oceanic and Atmospheric Administration (administered by the 

Department of Commerce).

35Pub. L. No. 98-94 provided for accrual funding of the military retirement system and for 

the establishment of a Department of Defense Military Retirement Fund in 1985.

Military Pension 

Benefits 

Background 
Appendix I: Information on Selected Fiscal 

Exposures

Page 43 GAO-14-28 Fiscal Exposures

payments to those receiving both military retired pay and disability 

compensation paid by the Department of Veterans Affairs (VA).36

The government’s legal commitment to pay benefits to those retirees who 

reach 20 years of active service makes military pension benefits an 

explicit exposure.

From a government-wide perspective, the magnitude of the exposure can 

be estimated by the accrued liability for military pensions, which at the 

end of fiscal year 2012 was estimated to be $1.5 trillion, up from $708 

billion in 2001 (see figure 9).

 

36Concurrent receipt refers to the simultaneous receipt of military retired pay and VA 

disability compensation. Prior to 2004, the law required that military retired pay be reduced 

dollar-for-dollar by the amount of any VA disability compensation received (e.g. an offset). 

The 2004 National Defense Authorization Act (Pub. L. No. 108-136) authorized concurrent 

receipt of both amounts without a required offset for certain military retirees. 

Extent and Estimated 

Magnitude of the Exposure
Appendix I: Information on Selected Fiscal 

Exposures

Page 44 GAO-14-28 Fiscal Exposures

Figure 9: Military Pension Benefits Accrued Liability and Budgetary Resources in 

the Military Retirement Fund, Fiscal Years 2001 through 2012

Notes: Data on receipts to the trust fund, outlays, and trust fund balances from the President’s Budget 

Appendix. Data on liabilities from the Financial Reports. 

Figure 9 also shows the Military Retirement Fund’s outlays and receipts 

as reported in primary budget data. Outlays reflect benefit payments to 

current retirees, which totaled $49 billion in 2012, up from $34 billion in 

2001. Receipts to the trust fund capture the intragovernmental 

contributions from the services to fund future benefits earned today, 

Treasury general fund payments, and investment income on the Treasury 

Securities the fund holds. The Military Retirement Fund had assets of 

$376 billion as of September 30, 2012.

Beginning in 1985, military pension costs have been partially visible to 

DOD since it makes contributions to cover the costs as they accrue, but 

the normal cost is not reflected in the unified budget because the 

payments are intragovernmental—that is, they are recorded as outlays by 

Budget Treatment of the 

Exposure 
Appendix I: Information on Selected Fiscal 

Exposures

Page 45 GAO-14-28 Fiscal Exposures

one agency and receipts by the trust fund. Since no cash leaves the 

government, there is no effect on the government-wide deficit.

DOD’s military compensation system, including pension benefits, is an 

important tool to attract and retain the number and quality of active duty 

servicemembers it needs to fulfill its mission. Comprehensive information 

about the total cost of compensation, including benefits earned today that 

will be paid in the future, is important for future decisions about military 

compensation in a constrained fiscal environment.

Key Factors to Consider
Appendix I: Information on Selected Fiscal 

Exposures

Page 46 GAO-14-28 Fiscal Exposures

TRICARE is DOD’s managed health care system for active duty and 

retired uniformed service members and their families.37 TRICARE 

consists of multiple plan options, a number of which cover active duty 

personnel, their dependents, and retirees under age 65.38 Prior to 2001, 

TRICARE beneficiaries would lose their TRICARE coverage when they 

reached age 65, and Medicare—the federal health insurance program 

that provides medical benefits to elderly and disabled Americans—would 

become their primary health insurer. However, in 2001, the Congress 

expanded TRICARE by authorizing the continued provision of TRICARE 

benefits after age 65. The program is known as TRICARE for Life (TFL).39

TFL provides supplementary health care coverage for TRICARE 

beneficiaries who are eligible for Medicare (e.g. those aged 65 or older) 

and pays for many services that Medicare only partially covers.40 NonMedicare-eligible military retirees are not eligible for TFL and are covered 

by one of the other TRICARE programs.

In addition to expanding the benefits available to Medicare-eligible 

retirees, the 2001 National Defense Authorization Act (NDAA) required 

that DOD accumulate funds in a governmental trust fund to finance the 

future cost of additional health benefits for Medicare-eligible retirees. This 

 

37The uniformed services include the U.S. Army, U.S. Air Force, U.S. Navy, U.S. Marine 

Corps, U.S. Coast Guard, the Commissioned Corps of the Public Health Service, and the 

Commissioned Corps of the National Oceanic and Atmospheric Association.

38DOD provides health care benefits to its non-Medicare-eligible beneficiary population 

through several TRICARE options. 

39The National Defense Authorization Act for Fiscal Year 2001, Pub. L. No. 106-398 

established the Department of Defense Medicare-Eligible Retiree Health Care Fund, 

administered by the Secretary of the Treasury.

40While TRICARE beneficiaries over age 65 do not have to pay for their TFL coverage, 

they must be eligible for Medicare Part A and elect to carry Medicare Part B. Retired 

TRICARE beneficiaries are required to pay premiums for Medicare Part B, which covers 

certain physician, outpatient hospital, laboratory, and other services. TFL covers out-ofpocket costs incurred by beneficiaries for care over the sum of the amount paid for under 

Medicare. 

Military PostRetirement Health 

Benefits 

Background 
Appendix I: Information on Selected Fiscal 

Exposures

Page 47 GAO-14-28 Fiscal Exposures

fund was started in reaction to rapidly rising health care costs. The 

Medicare-Eligible Retiree Health Care Fund (MERHCF) is financed 

through annual transfers from DOD for the future health care benefits 

earned by active military in that year (i.e., normal cost contributions); 

payments from the Treasury general fund toward the previously 

accumulated unfunded liability for past service; and any gains on 

investment income from Treasury Securities the fund holds. 

The government’s legal commitment to provide post-retirement medical 

benefits to eligible retirees makes the benefits an explicit exposure.

From a government-wide perspective, the magnitude of the exposure can 

be estimated by the accrued liability for military post-retirement health 

benefits, which at the end of fiscal year 2012 was estimated to be $833 

billion. The retiree health liabilities for military personnel, shown in figure 

10 as the accrued liability, represents the estimated total cost of benefits 

earned to date for both non-Medicare eligible and Medicare-eligible 

retirees, as well as a portion of future benefits for those in active military 

service. Figure 10 also shows the balance of the MERHCF, which had 

assets of $176 billion at the end of fiscal year 2012.

Extent and Estimated 

Magnitude of the Exposure
Appendix I: Information on Selected Fiscal 

Exposures

Page 48 GAO-14-28 Fiscal Exposures

Figure 10: Military Post-Retirement Health Liability and Medicare-Eligible Retiree 

Health Care Fund Balance, Fiscal Years 2003 through 2012

Notes: Trust fund balances from the President’s Budget Appendix. Data on liabilities from the 

Financial Reports. 

Beginning in 2003, current costs for Medicare-eligible military retirement 

benefits have been visible to DOD, since it makes contributions to cover 

the costs for those benefits as they are earned by current 

servicemembers, and the uniformed services reflect these normal cost 

contributions in their budgets. The Treasury also deposits funds towards 

the unfunded liability. Since no cash actually leaves the government from 

these contributions to the MERHCF, there is no effect on the governmentwide cash deficit. Assets accumulating in the MERHCF are only used to 

pay benefits for Medicare-eligible retirees, and there is an effect on the 

government-wide deficit as benefits are paid from the MERHCF. In 

contrast, the cost of pre-Medicare-eligible post-retirement health benefits 

is not reflected in the uniformed services’ budget data as these benefits 

are earned. Rather, the cost of pre-Medicare-eligible health care is paid 

Budget Treatment of the 

Exposure 
Appendix I: Information on Selected Fiscal 

Exposures

Page 49 GAO-14-28 Fiscal Exposures

for on a cash basis from DOD’s annual Operations and Maintenance 

appropriation.

We have highlighted a range of long-standing issues surrounding DOD’s 

Medical Healthcare System. As health care consumes an increasingly 

larger portion of the defense budget, DOD leadership has recognized the 

need to reduce duplication and overhead to operate the most efficient 

health system possible. In 2012, we reported that DOD had identified 

initiatives aimed at slowing its rising health care costs, but its ability to 

implement and monitor these initiatives and achieve related costs savings 

is limited.41

 

41GAO, Defense Health Care: Applying Key Management Practices Should Help Achieve 

Efficiencies within the Military Health System, GAO-12-224 (Washington, D.C.: Apr. 12, 

2012).

Key Factors to Consider
Appendix I: Information on Selected Fiscal 

Exposures

Page 50 GAO-14-28 Fiscal Exposures

The federal government provides benefits to eligible veterans and their 

survivors to compensate for the loss of potential earnings due to serviceconnected disability or death. Entitlement to compensation depends on 

the veteran’s disabilities having been incurred in, or aggravated during, 

active military service; death while on duty; or death resulting from 

service-connected disabilities.42 These benefits can be in place of (or in 

combination with) the DOD military retired pay.43

The government’s legal commitment to provide compensation to eligible 

veterans makes veterans compensation payments an explicit exposure.

The magnitude of the exposure can be estimated by the accrued liability, 

which at the end of fiscal year 2012 was estimated to be $1.8 trillion. This 

measure reflects the present value of expected future payments to 

current veterans already receiving compensation payments, to veterans 

who are not currently receiving compensation but will in the future, and to 

a portion of those in active military service assumed by the VA to become 

eligible for compensation in the future. Figure 11 illustrates the growth in 

this exposure, which more than doubled between 2001 and 2012—from 

$692 billion to $1.8 trillion—and represents the fastest rate of growth 

among the compensation programs we examined in this report. The 

annual growth of the accrued liability, which averaged about $97 billion 

from fiscal years 2001 to 2012, reflects increases in the number of 

veterans as a result of wars and other conflicts, the aging of the veteran 

population, and changes in the benefits and services provided to 

veterans.

 

42Burial benefits are also provided and include a burial and plot or internment allowance 

payable for a veteran who, at the time of death, is qualified to receive compensation or 

pension, or whose death occurred in a VA facility.

43Prior to 2004, the law required that military retired pay be reduced dollar-for-dollar by the 

amount of any VA disability compensation received (e.g. an offset). The 2004 National 

Defense Authorization Act (Pub. L. No.108-136) authorized actual concurrent receipt, or 

the simultaneous receipt of military retired pay and VA disability compensation for certain 

military retirees. 

Veterans 

Compensation 

Background 

Extent and Estimated 

Magnitude of the Exposure
Appendix I: Information on Selected Fiscal 

Exposures

Page 51 GAO-14-28 Fiscal Exposures

Figure 11: Veterans Compensation and Pensions Liability and Annual Outlays, 

Fiscal Years 2001 through 2012

Note: Outlays in this figure from the President’s Budget Appendix and reflect not only payments for 

veterans compensation but also veterans pension benefits and burial benefits. Pension and burial 

benefits represent a relatively small portion of outlays. Data on liabilities from the Financial Reports. 

Veterans Compensation and Pensions annually receives no-year funds 

through regular appropriations. Figure 11 also shows the program’s 

annual outlays as reported in primary budget data. Outlays, which 

increased from $21 billion in fiscal year 2001 to $55 billion in fiscal year 

2012, reflect payments made to current veterans. However, the budget 

does not reflect the estimated costs of future payments earned by current 

service.

The VA’s Veterans Compensation and Pensions account funds one of the 

largest federal disability programs. In the years ahead, enrollment in the 

VA’s disability compensation program could increase given the conflicts in 

Iraq and Afghanistan and as more Vietnam veterans—a significant 

Budget Treatment of the 

Exposure 

Key Factors to Consider
Appendix I: Information on Selected Fiscal 

Exposures

Page 52 GAO-14-28 Fiscal Exposures

portion of the total veteran population—further age into disability-prone 

years.44 These trends directly affect the extent and magnitude of the 

government’s fiscal exposure arising from veterans compensation. 

Further, since 2003, veterans compensation and other federal disability 

programs have been on our High Risk List, due in part to challenges 

agencies face in keeping their criteria for evaluating disability and 

determining compensation consistent with advances in medicine, 

technology, and changes in the labor market and society.45

 

44GAO, VA Disability Compensation: Action Needed to Address Hurdles Facing Program 

Modernization, GAO-12-846 (Washington, D.C.: Sept. 10, 2012).

45GAO-13-283. 
Appendix II: Comments from the Department 

of Veterans Affairs

Page 53 GAO-14-28 Fiscal Exposures

Appendix II: Comments from the Department 

of Veterans Affairs
Appendix II: Comments from the Department 

of Veterans Affairs

Page 54 GAO-14-28 Fiscal Exposures
Appendix III: GAO Contact and Staff 

Acknowledgments

Page 55 GAO-14-28 Fiscal Exposures

Susan J. Irving, (202) 512-6806 or irvings@gao.gov

In addition to the contacts named above, Melissa Wolf (Assistant 

Director), Margaret McKenna Adams, Dean Campbell, Darryl Chang, 

Jeremy Choi, Robert F. Dacey, Felicia Lopez, Donna Miller, Susan Offutt, 

Frank Todisco, and Katherine Wulff made key contributions to this report. 

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact

Staff 

Acknowledgments 

(451001)
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